Last week, stocks were modestly lower, and Treasury bond yields were higher as the U.S. Consumer Price Index (CPI) and Producer Price Index (PPI) inflation reports for January came in hotter than expected.
However, only four of the 11 S&P 500 major sectors closed lower than the prior Friday while five of them climbed more than 1%. That constitutes a positive technical divergence! The heavily weighted information technology sector saw the sharpest drop, down 2.5%, followed by the communication services sector, which fell 1.6%. On the flip side, the materials (+2.4%) and energy (+2.2%) sectors saw the biggest gains.
Stocks recovered from a sharp drop after Tuesday’s CPI inflation report, and the S&P 500 even set new all-time highs last week. But investors may still be feeling anxious.
Can inflation continue to moderate, as it has over the past year, even in the face of resilient economic growth, or is this the start of a trend in the wrong direction?
This past week’s inflation readings also pushed out the expectations for Federal Reserve interest rate cuts, which markets now expect to begin in June. Overall, while last week’s January CPI and PPI data was disappointing for investors, I don’t believe it signals a sustainable trend of higher inflation. Keep in mind that PPI inflation has already fallen below the 2% target, coming down meaningfully from highs of nearly 12% in 2022.
Perhaps another factor in play in the January CPI and PPI readings is what’s known as the “January effect” for consumer and wholesale prices. Corporations tend to push through price increases at the beginning of the year, which can have an outsized impact on January inflation data. But it may be more of a one-off effect versus a persistent trend in the year ahead.
So far, year to date, the indices have kept above water. The Nasdaq 100, or NDX, has led the way with a gain of 5.1%. Close behind is the S&P 500 or SPX +4.9%, while transportation and small-cap indices also gained but trail considerably.
I firmly believe that the period just ahead will be very telltale as to market direction, perhaps for the next few weeks. We’ll need to be very diligent and pay close attention to the technicals for clues, next week in particular. It won’t be a time to be cavalier or careless. Preparation, focus and discipline will be paramount,so be on your toes!
And remember, trade what you SEE not what you think!
By HARRY BOXER
Veteran Trader, Expert Technical Market Analyst & Founder of TheTechTrader.com
Get Live Market Guidance As It Happens
Start a FREE trial 10-day Trial And Gain VIP Access To The Tech Trader Today
Gain instant access to the live trading room where Harry share’s his pre-market focus list, live market analysis, recommendations and commentary from market open to close, along with livestream webinar.
